A Cointegration Analysis of the Long-Run Supply Response of Spanish Agriculture to the Common Agricultural Policy

Using cointegration techniques, we estimate two models that capture the long-term relationship between Spanish prices and agricultural production. The models were estimated over Spanish agricultural data from 1970 to 2000, a period spanning Spain’s implementation of the Common Agricultural Policy in 1986 and the application of the MacSharry Reforms in 1992. The models, as well as plausible counterfactual scenarios constructed to assess the production changes induced by the CAP, lead to three principal results. First, we find that Spanish agricultural output is responsive to agricultural prices. Second, we find that the MacSharry reforms have been instrumental in restraining agricultural production. Third, we find that Spanish agricultural output would have been higher if Spain had not applied the CAP. These results are important and have broad implications. First, they strengthen the position of those reformers both within and outside of Europe that argue for lower price supports as an appropriate policy for stemming European agricultural surpluses. Second, they indicate that recent EU reforms, which have in effect extended the MacSharry reforms, are appropriate measures for curbing European agricultural surpluses.